Wednesday, July 01, 2015

Independence Day 2015

The celebration of the 800th anniversary of Magna Carta, sealed in June 1215, is a fitting backdrop to thinking about Independence Day 2015. While Magna Carta’s impact on Anglo-American jurisprudence is sometimes exaggerated, there is no doubt that, in fact, the Great Charter has played an influential role in the development of our nation’s understanding of rule of law principles.

So, this Independence Day I propose to discuss the rule of law – without which there would not exist the “unalienable Rights” of “Life, Liberty, and the Pursuit of Happiness” proclaimed in the Declaration of Independence and secured by the Revolution of 1776. 

And while there is an embarrassment of riches from which to choose, I propose to use the Federal Communications Commission’s recent adoption of new Internet regulations – “net neutrality” mandates – to illustrate how overly broad, vague government regulations serve to undermine rule of law norms.
First, back to Magna Carta and its most frequently cited provision, Chapter 39, which provides: “No free man is to be arrested, or imprisoned, or disseised [i.e., dispossessed]…or in any other way ruined…except by the lawful judgments of his peers or by the law of the land.” It is from this “law of the land” guarantee that the concept of “due process of law” largely developed. This owes much to Sir Edward Coke, who in his famous Institutes, equated the phrase “due process of law,” first found in an English statute of 1354, with Magna Carta’s “law of the land.”
The American Constitution’s framers, intimately familiar with both Magna Carta and Coke’s Institutes, incorporated the “due process of law” guarantee into the United States Constitution through the Bill of Rights. The Fifth Amendment provides: “No person shall…be deprived of life, liberty, or property, without due process of law.”
A rule of law regime that conforms to our jurisprudential understanding of “due process of law” generally must include the following elements: (1) fidelity to rules; (2) of principled predictability; and (3) embodied in valid authority external to individual government decision-makers. As Ronald Cass puts it in his book, The Rule of Law in America, the rule of law “pulls society in the direction of knowable, predictable, rule-based decision-making, toward limitations on the alignment of power with legitimacy.”
Now to the FCC’s new Internet regulations – found in its artfully styled Open Internet order – as an example of government action substantially at odds with traditional rule of law norms. FCC Chairman Tom Wheeler has made somewhat of a fetish of declaring that the Commission’s role is to act as a “referee on the field who can throw the flag” or a “referee with a yardstick” to enforce the “basic ground rules” – or some variation thereof. Perhaps in a sports-crazed nation the invocation of a flag-throwing referee is seductive. The fundamental problem, of course, is that unlike football, or any other sport, the Open Internet order does not contain, in significant part, rules of “principled predictability” against which flags can be thrown.
Without belaboring here other aspects of the rules’ built-in vagueness, I will simply point to one key part of the agency’s Internet regulation order that, prima facie, shows that the legal requirements are not knowable in advance. In what the FCC itself calls a “general conduct standard,” the regulations provide that Internet providers “shall not unreasonably interfere with or unreasonably disadvantage” users’ Internet services or competitors. In the technologically dynamic, rapidly evolving Internet environment, where new business models emerge and are modified in response to changing consumer demands, this “no unreasonable interference/disadvantage” standard leaves too much unbridled discretion in the hands of the government enforcers. In other words, the referee can throw the flag – and levy huge multi-million dollar fines – without reference to any “basic ground rules” of “principled predictability” knowable in advance.
Contrary to rule of law norms that align power with legitimacy, regulations such as the FCC’s open-ended general conduct proscription serve to undermine the legitimacy of government action.
Federalist No. 62 (probably authored by James Madison) addresses the “calamitous” effects of mutable policy resulting from laws “so incoherent that they cannot be understood.” The author declares: “Law is defined to be a rule of action; but how can that be a rule, which is little known and less fixed?” According to the Federalist, this little known/less fixed conception of law “poisons the blessings of liberty itself.”
As I said, the FCC’s action in the Open Internet proceeding is just one example of a government action in tension with rule of law norms, albeit an important one. Many others could be cited.
As we celebrate this Independence Day – and the 800th anniversary of Magna Carta too – we should be cognizant of protecting the freedom we enjoy. And we should expect our government officials to uphold the rule of law, so as not to “poison the blessings of liberty itself.”
Best wishes for a Happy Independence Day 2015!
PS – My previous Independence Day messages are here: 2007, 2008, 2009, 2010, 2011, 2012, 2013, and 2014.

Monday, June 29, 2015

U.S. Needs More Than 350 MHz of Additional Licensed Spectrum

On June 24, Coleman Bazelon and Guilia McHenry of The Brattle Group released a new study prepared for CTIA – The Wireless Association. The study is entitled: “Substantial Licensed Spectrum Deficit (2015-2019): Updating the FCC’s Mobile Data Demand Projections.”
Here is the study’s conclusion as presented up front by Mr. Bazelon and Ms. McHenry:

“Five years ago the Federal Communications Commission projected a licensed spectrum deficit of almost 300 MHz by 2014. Using the FCC’s own formula and approach, we update that forecast and find that by 2019, the U.S. will need more than 350 additional MHz of licensed spectrum to support projected commercial mobile wireless demand. Accordingly, over the next five years the United States (U.S.) must increase its existing supply of licensed broadband spectrum by over 50 percent.

This analysis relies on current projections that demand for wireless broadband capacity, even after accounting for offload to unlicensed services, will increase by six-fold by 2019. Our predictions suggest that just under half of this new demand can be met by increased deployment of cell sites and improved technology, particularly a heavier reliance on 4G and LTE Advanced technologies. In the past six years, wireless operators have invested over $160 billion and, even with additional spectrum, a similar financial commitment will be necessary to enhance and expand networks to help meet significantly higher data volumes.

After accounting for this increased investment by carriers in network technology and infrastructure, we estimate that by 2019 net data demand will increase more than three-fold over 2014 levels. This remaining increase in demand will need to be met by additional licensed spectrum allocations. Importantly, if demand increases faster than expected, if technology deployments lag, or if cell site deployment slows, even more licensed spectrum will be needed. Finally, even if over 350 MHz is repurposed to mobile broadband in the next five years, that spectrum will not address the even greater demand that we expect in 2020 and beyond.”

There is no doubt that making available adequate spectrum to accommodate the increasing demand for wireless services is crucial to the nation’s social and economic well-being. This new study by Mr. Bazelon and Ms. McHenry makes an important contribution in documenting the need for 350 MHz of additional spectrum by 2019 to support projected demand.
For many years, FSF scholars have addressed the need for additional licensed spectrum for wireless services. In the coming days and weeks, we will have more to say about the new study and ways to address the increasing demand for licensed spectrum.

Wednesday, June 17, 2015

U.S. Senate Should Emulate Florida's Wireless Tax Cuts

On June 15th, Florida’s House and Senate passed legislation which would save the state’s taxpayers $430 million. Included in these tax cuts is a $100 million annual Communication Service Tax reduction on wireless services.
Although this legislation does not cut wireless taxes as much as Governor Rick Scott’s proposal outlined (see here), it is certainly a positive step for Florida wireless consumers, who currently pay the 4th highest wireless tax rate in the country. Effective July 1st, Florida residents will see their wireless tax rates decrease by 1.73 percentage points. This may seem small but considering that 56 percent of all poor American adults had only wireless Internet service as of December 2013, this will substantially benefit low-income Florida residents.
As I posted in a blog back in April 2015, the United States Congress should emulate Florida’s approach on wireless taxation. The House of Representatives did so last week when it passed the Permanent Internet Tax Freedom Act (H.R. 235), which bans state and local taxes on Internet access. Now, the Senate should quickly pass its version of the bill, the Internet Tax Freedom Forever Act (S. 431). Permanently banning taxes on Internet access would help keep the Internet affordable to the poorest Americans and would lead to additional market-driven innovation, content, and economic growth.  

Friday, June 12, 2015

Airbnb's David Hantman Discusses Competition in the Lodging Market

The Federal Trade Commission (FTC) hosted a stimulating workshop on the “sharing economy” on Tuesday, June 9, 2015. The workshop offered a variety of perspectives from regulators, academics, and industry executives on the sharing economy’s emerging and innovative business models.
I found the third panel particularly interesting because its participants included industry executives associated with emerging sharing applications and incumbent business models. Specifically, the back-and-forth conversation between David Hantman, Head of Global Public Policy for Airbnb, and Vanessa Sinders, Senior Vice President and Head of Government Affairs for the American Hotel and Lodging Association, was very informative.
Ms. Sinders argued that Airbnb should abide by the same set of rules and regulations that hotels abide by. She said that without these regulations there is a possibility that Airbnb consumers could experience unsafe and/or unhealthy conditions. She claimed that hotel consumers have a consistent expectation about what they will experience when they walk into their rooms while Airbnb users do not. But Mr. Hantman stressed that the reputation feedback mechanism within Airbnb’s application has created transparency and accountability for every transaction, which enables trust between the hosts and the guests. He also mentioned that Airbnb has a $1 million insurance policy that protects users in case any unforeseeable incidents arise.
Among her concerns, Ms. Sinders stated that many hosts are using Airbnb as a business enterprise and renting out entire apartment buildings. She said: “If it looks like a hotel and acts like a hotel, it should be treated like a hotel.” But Mr. Hantman agreed with her that the hosts who use the Airbnb platform to essentially run a hotel operation should be required to get business licenses just like hotels. He stated, however, that the overwhelming majority of Airbnb hosts only share their homes a couple times a year, and many do it in order to make ends meet. Mr. Hantman said these are the people that the Airbnb online platform targets as hosts.
Interestingly, Mr. Hantman declared that, in his view, he and Ms. Sinders are actually in agreement on most things, even though Ms. Sinders refuses to acknowledge it. They both do not want consumers to experience unsafe or unhealthy conditions, and they both think hosts who rent out their spaces in the same fashion as a traditional hotel should obtain a license.
In response to Ms. Sinders’ claim that Airbnb listings are “illegal hotels,” Mr. Hantman reported that Airbnb has tried on many occasions to pay lodging taxes in New York (where it has received a substantial pushback from Attorney General Eric Schneiderman), but, curiously perhaps, the lobbying efforts of the American Hotel and Lodging Association, thus far, have helped prevent Airbnb from doing so.
In an FSF blog from October 2014, Randolph May and I analyzed the New York Attorney General Eric Schneiderman’s report in which he characterized Airbnb listings as “illegal hotels.” We argued that, aside from disputable legal characterizations, all the data in the report shows that these so-called “illegal hotels” benefit consumers and New York’s economy. If they were not meeting the demands of consumers, then Airbnb’s economic activity in New York would not be increasing annually.
As Mr. Hantman stated at the FTC’s workshop, if the lack of tax payments was the only reason for questions about the legality of Airbnb listings in many cities, then these concerns would have been worked out because Airbnb is willing to comply. Instead, lobbying pressure from the hotel industry to local governments (presumably based on fear of competition) has resulted in legal or regulatory threats to Airbnb listings in many cities around the world.
As Randolph May and I stated in our July 2014 Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”
If the laws or regulations applicable to the existing incumbent businesses no longer make sense today, they should be changed. It always harms consumers when public policymakers attempt to “level the playing field” by subjecting entities to regulatory restrictions that are not needed. The proper way to respond to “level the playing field” claims is to remove unnecessary regulations wherever they apply, not to expand them to new entities.
In Mr. Hantman’s concluding remarks, he stressed that he is optimistic that mutually satisfactory agreements will be reached in the cities where Airbnb’s compliance with legal requirements is called into question so that it can continue to serve consumers. He said Airbnb wants to work with local governments around the world to provide them with anonymized data so they can monitor the activity that is occurring in their jurisdictions, while also protecting the privacy of Airbnb users.
This was just one of the many informative topics discussed at the FTC’s workshop on the sharing economy. I anticipate posting a blog in coming days about the key takeaways from the discussions at the workshop.

Thursday, June 11, 2015

Designating Designated Entities for Reform

The Federal Communications Commission needs to designate the so-called “Designated Entities” program for meaningful reform.

Although the legislation authorizing the FCC to conduct spectrum auctions promotes allocation of spectrum for the highest and best use, it also permits the FCC to give preferences, in the form of “bidding credits,” to Designated Entities in order to promote participation by small businesses in the auctions. Not surprisingly, the FCC has struggled over the years, with limited success, to implement the “small business” program in a way that avoids abusive conduct. I say, “not surprisingly,” because it is not easy to devise a complicated regulatory regime – one that, by design, promises special preferences and large financial rewards to particular “designated entities” – in a way that does not invite abuses and unjust enrichment.

And in the case of spectrum auctions, while certain parties taking advantage of their favored designation may be unjustly enriched, taxpayers are unjustly harmed by the same measure. In the most recent controversy surrounding the program, it appears that substantial, non-controlling interests from large bidders raise concerns about the integrity of the program, particularly when joint bidding is involved.

In many respects, the recent AWS-3 auction, which garnered nearly $45 billion in revenues (reduced by about $3.3 billion because of DE bidding credits), was a success. However, whatever success the auction enjoyed has been somewhat called into question by the joint bidding of Dish and two small DEs, Northstar, and SNR Wireless. It turns out Dish has a non-controlling 85 percent ownership interest in the DEs. All three firms together accounted for about $10.3 billion in winning bids. Although large bidders have had substantial, non-controlling interests in DEs in the past, the type of joint bidding arrangement used in the AWS-3 auction apparently is unprecedented.

FCC Commissioners Pai and O'Rielly have expressed concerns regarding the operation of the DE program, including in the context of the AWS-3 auction. Commissioner Clyburn also has expressed concern, albeit more mildly. And Chairman Wheeler, to his credit, ordered the staff to take a close look at the program and issued a detailed Public Notice seeking comment.

Based on an economic analysis of the auction bidding, Verizon has suggested that Dish, Northstar, and SNR Wireless engaged in anti-competitive, collusive bidding. A coalition of mobile companies, including AT&T and a number of small companies, propose to reform the DE program by eliminating joint bids by a bidder with significant ownership interests in other joint bidders seeking to utilize DE bidding credits. The coalition proposes to preserve DE credits for genuine small businesses as well as rural telephone companies. It suggests that its reform proposal would preserve the DE program’s original intent, without giving unfair advantages to multi-billion dollar bidders.

Dish, of course, argues that it, Northstar, and SNR complied with the existing rules, including bidding disclosure requirements. Dish argues that its participation increased auction receipts, financing for small companies, and the diversity of bidders.

Whether or not Dish, Northstar, and SNR complied with the existing bidding rules is not irrelevant, of course. But, for me, it is not the main point, which is that spectrum auctions, to the maximum extent possible, should be conducted on an unencumbered, free market basis, without special dispensations and preferences. This will ensure that spectrum is put to the highest and best use, maximizing consumer welfare. In the bargain, it will maximize auction revenues to the benefit of the nation’s taxpayers.

The DE program, obviously a special carve-out to the unencumbered auction principle, is meant to help small businesses, rural telephone companies, and businesses owned by minority groups gain access to spectrum. Unfortunately, however, the DE program has not been very successful in achieving its objectives, however valid they may be. And in the past the program has arguably produced skewed bidding results. Moreover, the majority of small business bidders, excluding companies associated with rural telephone companies, end up selling their spectrum to the highest bidders, rather than building out networks. On top of all this, DE auction awardees often are mired in post-auction litigation for long periods, resulting in network build-out delays that otherwise might not have occurred.

All this said, the FCC is right to designate the Designated Entities program for meaningful reform to curb abuses. When abusive conduct occurs that is inconsistent with the underlying public policy purposes of the DE program, it undermines the integrity of particular auction results. Perhaps more importantly, abuses also undermine public confidence in the Commission’s ability to carry out its duties effectively and efficiently.

Wednesday, June 10, 2015

House Passed the Permanent Internet Tax Freedom Act

On Tuesday June 9th, the House of Representatives voted to pass the Permanent Internet Tax Freedom Act (H.R. 235), which would permanently ban state and local taxes on Internet access. (See this blog.)
Now, it is up to the Senate to pass its version of the bill, the Internet Tax Freedom Forever Act (S. 431). The House passed the Permanent Internet Tax Freedom Act last summer when the temporary ban on Internet access taxes was about to expire but the Senate failed to pass its bill. Hopefully with the help of some new Senators, this summer’s Congressional session will be different.
The temporary ban is set to expire on October 1, 2015.  Therefore, I urge the Senate to pass the Internet Tax Freedom Forever Act as soon as possible so all Americans can access an affordable Internet. 

Monday, June 08, 2015

House Scheduled to Vote on the Permanent Internet Tax Freedom Act

This week the House of Representatives is scheduled to vote on the Permanent Internet Tax Act (HR 235), which would ban state and local taxes on Internet access.
The current ban on Internet access taxes has been extended many times since it originated in 1998 (and is set to expire once again on October 1, 2015). But if this legislation passes, the ban would become permanent and discriminatory taxes on e-commerce would also be prohibited, according to this article in The Hill.
It is very important for consumers and Internet Service Providers that the House pass this legislation. Taxes imposed on any good or service raise the price, resulting in a decrease in the quantity demanded from consumers. Whether taxes are shifted on consumers or businesses, the elasticity of demand and supply allows for both sides of the market to inherit the burden, ultimately leading to less economic activity and growth.
Taxes on Internet access would be particularly regressive because it is often the poorest people that do not connect to the Internet. A tax on Internet access could push the price of broadband beyond many of the poorest consumers’ willingness to pay.  Even if a person had not adopted broadband service prior to the tax being levied, the increase in price would make that person less likely to adopt. Raising the price of an Internet access would be counterproductive to the many government programs that aim to connect America’s poorest individuals.
I commend Judiciary Committee Chairman Bob Goodlatte for introducing the Permanent Internet Tax Freedom Act and I urge the House to pass it.

Dealing Effectively With Effective Competition

Over the past couple of years, I have had far fewer opportunities to commend the Tom Wheeler-led FCC than I had hoped for – and this has been a disappointment. So, I don’t want to miss an opportunity to give credit where credit is due. I am happy to applaud Chairman Wheeler, along with Commissioners Pai and O’Rielly, for adopting an order on June 2 that presumes cable operators are subject to “effective competition.” As a result of establishing this rebuttable presumption, each local franchising authority (LFA) will be prohibited from regulating basic cable rates unless the franchising authority demonstrates the cable system is not subject to effective competition.

Truth be told, this action should not be controversial. But Commissioners Clyburn and Rosenworcel dissented, in part, because the regulatory relief, such as it was, extended to all cable operators, rather than to small operators only.

In dissenting, Commissioners Clyburn and Rosenworcel exhibited the difficulty many regulators have, even in the face of a competitive marketplace, in just “Letting Go” – as the late, world-renown regulatory economist Alfred Kahn put it in the title of one of his books. Fred Kahn, a proud Democrat, was President Jimmy Carter’s Civil Aeronautics Board Chairman, until he succeeded, working principally with Senator Edward Kennedy, in getting Congress to disband the New Deal-era agency that set airline rates and controlled route entry and exit. I am proud Fred was a member of the Free State Foundation’s Board of Academic Advisors. By the way, the subtitle of Fred’s Letting Go book, which is critical of regulators’ disposition to cling to legacy regulations in the face of marketplace competition, is instructive: “Temptation of the kleptocrats and the political economy of regulatory disingenuousness.”

I certainly don’t wish to accuse anyone of being a kleptocrat, or of being disingenuous. And I’m sure Fred conjured up the subtitle with that usual playful twinkle in his eye. But I do think Commissioners Clyburn and Rosenworcel were wrong to dissent.

The indisputable reality is that the video marketplace has changed dramatically since the 1992 Cable Act established a regulatory regime allowing local franchise authorities to regulate basic cable service rates. But under the 1992 Act, LFAs may regulate rates only if the Commission finds the cable operator is not subject to effective competition. As the Commission explains in its June 2 order:

In 1993, when the Commission implemented the statute’s Effective Competition provisions, the existence of Effective Competition was the exception rather than the rule.  Incumbent cable operators had captured approximately 95 percent of MVPD subscribers. In the vast majority of franchise areas only a single cable operator provided service and those operators had “substantial market power at the local distribution level.” DBS service had not yet entered the market, and local exchange carriers (“LECs”), such as Verizon and AT&T, had not yet entered the MVPD business in any significant way. Against this backdrop, the Commission adopted a presumption that cable systems are not subject to Effective Competition…. 

In contrast to 1992, as the Commission points out, today satellite video service is ubiquitous and satellite providers “have captured almost 34 percent of multichannel video programming distributor (MVPD) subscribers.” As my colleague Seth Cooper and I stated in Free State Foundation reply comments urging the Commission to adopt the pro-consumer deregulatory presumption it now has adopted:

The Commission’s rules for imposing cable rate regulations are premised on early 1990s suppositions about cable operators’ so-called “bottlenecks.” Those premises do not correspond to today’s reality. Consumers now enjoy the benefits of vibrant video competition, with choices including two nationwide DBS providers, so-called “telco” entrants in the video market, and myriad online and wireless video delivery options. 

In light of these marketplace changes, which are further detailed in the Commission’s order, the majority concludes that, in adopting the rebuttable presumption, the agency was updating its rules “for the first time in over 20 years, to reflect the current MVPD marketplace, reduce the regulatory burdens on all cable operators, especially cable operators, especially small operators, and more efficiently allocate the Commission’s resources.”

Considering the competition that has existed in the video marketplace for many years, the Commission could have – and should have – taken this deregulatory step long ago. In responding to Commissioner Clyburn’s and Commissioner Rosenworcel’s argument that the STELAR legislation only directs the FCC to streamline the regulatory process for small cable operators, the Commission majority responds, correctly, that STELAR nevertheless does not restrict the Commission’s authority to extend relief to all cable operators. More importantly, the Commission majority explains that the agency possesses – and always has possessed – authority under the Cable Act to adopt the deregulatory presumption.

At least since April 2011, when I published “A Modest Proposal for FCC Regulatory Reform,” I have been urging the Commission to employ deregulatory presumptions to provide swifter and surer relief from burdensome regulations that no longer make sense. The Commission has a sound basis for adopting such evidentiary presumptions regarding marketplace competitiveness on a broader scale. Despite the usual protests from competitors (such as the National Association of Broadcasters in the “effective competition” proceeding) and those organizations that generally oppose all regulatory relief measures, employing deregulatory presumptions is both pro-competition and pro-consumer.

Well, that’s an argument I can – and will – carry on another day. For now, I’ll just content myself with commending Chairman Wheeler and Commissioners Pai and O’Rielly for a job well done.